Journal article
Testing models of differentiated products markets: Consolidation in the cable tv industry
DP Byrne
International Economic Review | Published : 2015
DOI: 10.1111/iere.12123
Abstract
Research on differentiated products markets often uses structural demand/supply models to identify firms' marginal costs as product-level cost data are unavailable. Using unique demand and cost data from cable TV, I evaluate a differentiated products model's ability to identify marginal costs. I find firms systematically price below profit-maximizing levels, leading to biases in the model's marginal cost estimates. I study the implications for merger simulations and find that these biases compromise estimates of merger-related cost efficiencies, yet do not prevent these models from generating useful predictions of the price and nonprice effects of mergers.
Grants
Funding Acknowledgements
This article is based on a chapter from my 2011 Ph.D. dissertation. I thank my advisors, Chris Ferrall and Susumu Imai, for their advice and support. The editor, Holger Sieg, and anonymous referees provided comments that substantially improved the article. I have also received valuable feedback from Victor Aguirregabiria, Gaurab Aryal, Branko Boskovic, Ingrid Burford, Mick Coelli, Chris Edmond, Matt Grennan, Joe Hirschberg, Sacha Kapoor, Stephen Law, Simon Loerschter, Arvind Magesan, Harry J. Paarsch, Carlos Serrano, Junichi Suzuki, Tom Wilkening, and seminar participants from Queen's, Simon Fraser, University of Alberta, HEC Montreal, Carnegie Mellon (Tepper), The University of Melbourne, University of Toronto, ANU, UNSW, UTS, Victoria University of Wellington, and Otago. Funding from the Social Sciences and Humanities Research Council of Canada and the University of Melbourne Faculty Research Grant scheme is appreciated. The article was previously circulated as "Consolidation and Price Discrimination in the Cable Television Industry" and "The Impact of Consolidation on Cable TV Prices and Product Quality." The online Appendix for this article is available from the author's website. All errors and omissions are my own. Please address correspondence to: David P. Byrne, Department of Economics, The University of Melbourne, FBE Building, 111 Barry Street, Melbourne, VIC, 3010, Australia. E-mail: byrned@unimelb.edu.au.